My most recent books are the Leader's Guide to Radical Management (2010), The Leader's Guide to Storytelling (2nd ed, 2011) and The Secret Language of Leadership (2007). I consult with organizations around the world on leadership, innovation, management and business narrative. At the World Bank, I held many management positions, including director of knowledge management (1996-2000). I am currently a director of the Scrum Alliance, an Amazon Affiliate and a fellow of the Lean Software Society. You can follow me on Twitter at @stevedenning. My website is at www.stevedenning.com.

What Stiglitz Misses On Inequality: The Responsibility Of Economists

It is not a novel thought that each profession is acutely aware of the problems caused by others but is often unconscious of the problems for which it is responsible. The education system stifles learning by teaching to the test. Doctors and pharmaceutical companies prescribe medicines that cause new diseases that require new cures. Engineers create time-saving devices that end up wasting large amounts of our time. So it is not entirely a surprise that economists are also blind to problems that their profession has engendered.

Take the case of the Nobel Prize winning economist, Joseph Stiglitz, who this week offers his final entry in the New York Times’ series, The Great Divide, with the conclusion that inequality is not inevitable. The United States that was once a “shining city on a hill” has now become, he writes, “the advanced country with the greatest level of inequality.” In effect, it’s a choice that our society can make one way or the other. As a result of the actions of many individuals, our society has chosen inequality.

And Stiglitz names those responsible for this choice. They include CEOs, bankers, private equity titans, venture capitalists, politicians, deregulators, lobbyists, the Supreme Court, and those who run corporate welfare, the prison system, the high-price justice system and the unequal health system.

The missing villains: economists

Yet there is one category of actor curiously missing from Stiglitz’s list of villains: his fellow economists. There is no mention for instance that it was the winner of the Nobel Prize for Economics, Milton Friedman, whose New York Times article on September 13, 1970, “The Social Responsibility of Business is to Increase its Profits”, launched the idea that corporations should focus solely on making money for themselves and the shareholders, and basically, to hell with everyone else.

Nor is there any mention of the famous 1976 article by Professors Meckling and Jensen, “The Theory of the Firm,”—one of the most cited economics articles ever—which provided a supposed economic rationale for giving generous stock options to the top management so that they would focus sharply on making money for the company—and themselves. It was the nonsensical psychology and fantasy mathematics of this article that provided the economic rationale for the idea that the purpose of a firm is to maximize shareholder value and led to the very management practices about which Stiglitz so eloquently complains.

That article might be used as a case study on what’s wrong with economics. The initial premises of the article, based on false psychology, assume the conclusions that the paper is intended to prove. It then proceeds with fifty pages of impenetrable mathematics, much in the fashion of a medieval theologian calculating the number of angels that could dance on the head of a pin, and arriving at the conclusions implicit in the initial premises. Then the article is cited by thousands of economics “scholars” who show no sign of ever having read it, let alone having evaluated it.

Nor does Stiglitz make any any mention of the fact that the basic economics textbooks continue to cite the shareholder value theory as though it is so obvious that it doesn’t need any rationale or explanation. As one of the economics textbooks amiably confesses at the outset, “much of this book assumes the manager’s task is to maximize the profits of the firm that employs the manager.”

The economists are not to blame

According to Stiglitz, his fellow economists are not to blame for inequality. “The problem of inequality is not so much a matter of technical economics. It’s really a problem of practical politics.”

Thus Stiglitz’s article shows no awareness that maximizing shareholder value—which even Jack Welch has called “the dumbest idea in the world”—has led to the following disastrous economic consequences:

“We have located,” writes Stiglitz, “the underlying source of the problem: political inequities and policies that have commodified and corrupted our democracy.”

But where did those political inequities and policies come from? What Stiglitz’s article misses is that the managers, bankers and financiers about whose actions he complains have all been doing exactly what they were taught to do by his fellow economics professors. Even as we speak, a whole new generation of economics students are being taught the same misguided ideas. Should it be any surprise that these ideas are now pervasive in business and society? The bad actions are driven by bad economic ideas.

“The ideas of economists and political philosophers, both when they are right and when they are wrong,” wrote John Maynard Keynes, “are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist.”

Is it not possible that many of the villains identified by Stiglitz are intellectual “slaves” of economists whose ideas are dying but unfortunately not yet defunct?

As the late and great Sumantra Ghoshal wrote in his article in 2005, “Bad Management Theories Are Destroying Good Management Practices, “MBA students are not alone in having learned, for decades, these theories of management. Thousands—indeed, hundreds of thousands—of executives who attended business courses have learned the same lessons, although the actual theories were often not presented to them quite so directly. Even those who never attended a business school have learned to think in these ways because these theories have been in the air, legitimizing some actions and behaviors of managers, delegitimizing others, and generally shaping the intellectual and normative order within which all day-to-day decisions were made.”

Ghoshal’s tart advice to professors who agonize, ‘What more must we do to stop these bad practices?” was simple: stop teaching what you are currently teaching!

Economics is the sponsor and accomplice of inequality

As the winner of the Nobel Prize for Economics, Professor Stiglitz is positioned to be uniquely influential with his economist colleagues. By contrast, political harangues to managers, bankers and politicians, no matter how eloquent, are destined to fall on deaf ears.

Why not instead spend effort on professional colleagues and get them to stop teaching the nonsensical economics that is the real root cause of the problem? True, some of those colleagues won’t listen, particularly those who sit in university and foundation chairs bought and paid for by the moneyed interests that they write to please. But surely not every member of the profession has sold out?

I agree with Stiglitz that “it is not too late to restore our position in the world and recapture our sense of who we are as a nation.” But the leadership must come from those whose thoughts have caused us to head in the wrong direction, not only from those who are blindly implementing ideas that are “in the air.”

Indeed, as one of the doyens of the economics profession, surely Professr Stiglitz has a moral responsibility to point out to his colleagues that economics has become the sponsor and the accomplice of inequality.

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You are right to point the finger of blame at Friedman. However, it is one thing to stop teaching something, it is another to work out what should be taught instead. It seems to me that what we are missing is a new framework to replace that established by Freidman et al. We need a new economic idea that cannot simply be based on criticism of the old idea or piecemeal initiatives that are really just attempts to treat symptoms rather than address causes. http://bigsocietysuffolk.wordpress.com/2010/10/26/the-story-of-the-big-society/

I like Joe Stiglitz a lot as an economist, and actually read his book “Free Fall” although, like so many books written about what has been happening to our economy, it was ultimately a very depressing read. But I really liked your article as well, enough to follow one of the links and read another one. And I will probably read some more, as I feel that you are really on to something here. And I agree that so much of the blame for all this mess can be laid firmly at the feet of the economics profession. However, while I am not really aware of much of Joe Stiglitz’s other writings (yet) Paul Krugman has consistently railed against the failures of his colleagues in the economics profession, although to be fair, mainly in the macro- rather than micro- department. And surely much of the failures of micro-economists and business management specialists can surely be laid at their own failure to understand macro-economic functions which are affected by the mass adoption of their own micro-economic teachings. A good example of this might well be the stagnation of wages, and the resultant lack of aggregate demand in the economy due to the obsession by large corporations of cutting labor costs by cutting hourly wages wherever possible. But thank you for this article and the other ones you have linked to. As I said, I think you are really on to something here, and I intend to find out for myself what it is!

As a complement to identifying the missing villains, I am suggesting what to do about them: “Replacing the Science of EcoNoMics with the System Profession of EcoIsOurs ( http://bit.ly/537GMH ).”

Next is part of what I said under the article What Thomas Piketty Got Wrong, that I am repeating here:

Please accept the following suggestion. Instead of Robert Piketty deserving a Nobel Prize in EcoNoMics, I understand that it is Jay W. Forrester, the father of System Dynamics, who deserve a Nobel Prize, in the discipline of EcoIsOurs, in accordance with the blog post being distributed by the following tweet: